For-Profit Schools: ‘Agile Predators’ or Just Business Savvy?

Adding weight to the mounting pile of evidence against for-profit institutions, a new report from the National Bureau of Economic Research finds a grim future for students who attend for-profit schools.

The study, written by a trio of Harvard researchers, asked a fundamental question about the nature of the for-profit sector: Are these institutions “nimble critters” smartly capitalizing on the increased demand for college degrees by providing educational opportunities to students who would normally be shut out of higher education, or are they “agile predators” who target low-income and disadvantaged students in order to line their pockets with government money?

To find the answer, researchers compared the experiences of students who attend for-profit schools with peers of similar socioeconomic and demographic backgrounds who attend community colleges or other public or private non-profit institutions. What they found wasn’t pretty: Today, for-profit students account for 47% of all loan defaults. Indeed, one in four for-profit students will default on their loans within three years—as opposed to 8.7% of students at non-profit four-year institutions.

Why do so many for-profit students default on their loans? Well, to start, studies have shown low-income students enroll in for-profits at four times the rate of other students. Add to that the fact that they are charged more tuition than students at other comparable non-profit institutions—on average, $13,000 to $16,000 per year, nearly double the $8,000 charged by the average public, in-state four-year undergraduate institution—and it’s easy to see why they take on more student loans to begin with.

It gets worse. The researchers found that six years after they enter college, for-profit students are more likely to be unemployed—and to be unemployed for periods longer than three months. And, further, if they are able to find a job, students who attend for-profits make, on average, between $1,800 and $2,000 less annually than their peers who attended other institutions.

Despite such dismal outcomes for for-profit students, the study didn’t entirely write off these institutions, which range from institutions like the online University of Phoenix, which enrolled 532,000 students in the 2008-09 school year, to smaller certificate programs. Because these institutions provide training in a specific vocation or trade, they often provide a more direct route to a career than general education and liberal arts programs. They are highly-attuned to changes in the marketplace and are quick to respond by opening new schools, hire faculty and add programs in growing fields. As such, the industry is booming. For-profits are the fastest growing part of the U.S. higher education system, with enrollment increasing from just 18,333 in 1970 to 1.85 million in 2009.

The report also gives for-profit schools credit for educating a larger portion of minority, low-income, disadvantaged and older students than their peer institutions, and shows that they do a better job of retaining students through the first year and getting them to complete short-term certificate programs. That’s important: Minority and disadvantaged students often feel shut out of traditional colleges, and would-be students with families and full-time jobs often find it hard to attend traditional schools.

But by enrolling students more likely to need financial aid and charging them higher tuition prices, the report shows these schools guarantee themselves a disproportionally large share of federal student financial aid funding. For example, in the 2008-09 school year, despite enrolling only about 12% of all higher-education students, for-profits accounted for 26% of federal student loan disbursements and 24% of Pell grant disbursements.

The feds are aware of this disparity. Earlier this year the Senate launched an inquiry into the for-profit industry to determine whether taxpayer dollars were being funneled into private pockets at a fraudulent rate and the U.S. Department of Education finalized its “gainful employment” rule, meant to crack down on for-profits who load students with more debt than they can realistically repay.

Under the rule, every for-profit school has to meet one of three requirements in order to keep their federal financial aid: 1.) at least 35% of the school’s former students are repaying their loans; 2.) the estimated annual loan payment does not exceed 30% of the students’ discretionary income; or 3.) the estimated annual loan payment does not exceed 12% of the students’ total earnings. Colleges that fail all three metrics three times within four years will have their federal financial aid dollars cut.

Many critics argue that still more needs to be done to tame the industry. For-profit schools counter by saying they are being unfairly targeted while the government turns a blind eye to non-profit colleges and universities using similar practices. “Regulating for-profit colleges is tricky business,” the report concludes. “The challenge is to rein in the agile predators while not stifling the innovation of these nimble critters.”

Kayla Webley is a Staff Writer at TIME. Find her on Twitter at @kaylawebley, on Facebook or on Google+. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.